Wednesday, 21 October 2009

'Never has so much money been owed by so few to so many'

The words sound like Winston Churchill, but they are in fact those of Mervyn King, Governor of the Bank of England. At last, a senior, credible figure has come out and highlighted that what Governments and regulatory authorities are doing are merely tackling the symptoms of the financial problems. The causes remain undisturbed.

It's of no real surprise that only yesterday, RBS disclosed that they had hired 11 new traders in their Investment Banking division each at guaranteed salaries which will cost them £5m in the next year. Current executives are on track at RBS to pay out millions in bonuses to themselves as the bank wallows in the resurgence of its fortunes while still being 70% owned by us. How can it justify this in the face of what it has gone through?

Simple really, it doesn't have to.

Having being royally bailed out by mugs like us, RBS and all the other banks here and abroad are enjoying the fruits of the same reduction in values of distressed or toxic debt - the very debt that ruined the lot of them. With sleight of hand and a little alchemy, some banks are realising vast profits and making a few people multi-millionaires by just juggling names on paper while in the debt swaps and 'collaterallised this that and the other' derivative markets, the traders are making a killing on the very things that we had to come in and guarantee, write down or prop up. Cheap and free money, through things like Quantitative Easing, is pouring into the system and the banks are loving it - it's a dream come true. Not only were they bailed out when it all went wrong, but they were recapitalised, given a load of free cash and no one stopped them from doing what they were doing.

You get Lord Turner, looking increasingly marginalised as he mutters to himself about 'Tobin Taxes' and products which serve 'no social purpose', trying to draw attention to the fact that banks are conjuring money out of nothing. Then you get Lord Myners wandering around as if he knows something and thinks it is all about institutions who aren't challenging hard enough on fees. But what surpises me, and I dare say most other sane people who look at this from the outside, no one has got anywhere near the root of the problem.

The world of finance is running itself in a market where it can take nothing and make millions out of it. In that environment, no one will challenge each other on fees as there is no need to - vast profits are being made by everyone. There are no losers. There is no zero sum accounting involved - everyone makes money.

Has the penny dropped yet for anyone? Mervyn King seems to finally get part of the problem while Turner has alluded to it. The world of finance is a closed shop where the world of debt takes on a life of its own - it's like a roulette table with a ball for every possible number on every turn. There are no losers - it's only a question of how much you can make and that depends on how much cash you can get your hands on. To an outsider like me, it's obvious. You cannot keep making money out of nothing - not everybody can be winners. But that is precisely what is happening. The whole bonus culture is like sub-prime, it's just a manifestation of the flawed system. So much money is being made that there is so much extra after shareholders have been rewarded, costs met, tax paid that at Goldman Sachs this year $22bn will be divided up amongst staff in bonuses on top of other emoluments.

The penny hasn't dropped yet? Goldmans say this is from fees on mergers and the like but a close look at the whole market would suggest that activity on that front is not fuelling this vast resurgence. What is at the heart of it is exactly what was at the heart of the crash. Trading thin air for profit.

Mervyn King suggests that banks should be split so that riskier business is separated from the stable side of banks. I have argued this on my blog until I am blue in the face it is so damn obvious. When he says it, naturally it has credibility but when these banks fail, it is not their traders who get fired. In fact they are all taking on more traders at higher salaries and golden handshakes in the face of failure. It is the backroom staff and tellers in the branches who get shafted to pay for the losses - they are the short term safety valve.

This time around the losses were on such a scale as to bring the whole system to its knees and not any amounts of cuts would save them. So the world did the one thing that has guaranteed it will all happen again. We simply bailed them all out and did not reform the industry in the process. Not only have they now been propped up, but the reduced toxicity of the debt instruments they trade means the world is cheap and even bigger profits are to be made. And now they have the one thing they missed before - a limitless lack of liability which has been transferred wholly to taxpayers around the globe.

Mervyn King has said it all, 'The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.'

It has to be a fundamental reform of the entire banking system. The decoupling of risky and stable banking business would sideline the 'casino banking' as it is appropriately called and this would no longer have any Government protection. No longer would we have idiots like Brown saying we had to bail out the rich bankers as money would not flow to the ATMs. There would be no reason to do this as the whole system would become disconnected.

The penny hasn't dropped yet? If we follow Mervyn King's thinking, decoupling would end 'casino banking' as it is entirely inter-related to the stable banking business - it depends on that business for its supply of cash and debts to be traded. Without it, there are no real financial products for them to trade - Turner was spot on that count. Investment banking would have to get back to what it was meant to be doing - frankly, most people in the industry will have long forgotten what that was.

King has had an epihany after this crisis. It took a while - only his whole career. He says he finds it hard to see why limitless liability should be the domain of banks alone. He's right - we made banks the 'special industry' in the process of this crash. Meanwhile, businesses all over the world have suffered and crashed without an iota of liability being transferred to anyone other than those who should bear it. Why did Governments not save them?

Simple, they did not understand the nature of the financial system and why the whole crash occurred. Still today, Gordon Brown will tell you it was sub-prime that caused it. He is 100% wrong, sub-prime was only a symptom of the warped financial system. Because he doesn't understand it and he gets advised by the people who caused it, he will never fix it. Bonuses have little to do with it. The clue is in the vast profits the banks make on so little actual revenue. Goldmans' numbers give the clear sign - about a quarter of their revenue is net profit. Barclays keep turning debt designated as 'most toxic' into £billions of profit in a single transaction that makes investors and former staff multi-millionaires overnight. The embers of Lehmans, the largest corporate failure in history, their open derivative positions are being snapped up cheaply in the sure knowledge that the buyers will make billions.

The penny has yet to drop. I can't spell it out enough. You cannot make a profit out of nothing - there has to be a flaw in the system to do so. It is simple to the layperson. Conjuring tricksters, bunko boothmen, spivs and conmen have hijacked the financial system and we are their insurance policy. The crash will happen again - go figure.

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